An interchange fee is a charge assessed by the card issuer to the merchant acquirer for processing a credit or debit card transaction. Interchange fees are set by the card networks (Visa, Mastercard, etc.) and collected by the acquirer when a card-based transaction is processed.
In most cases, interchange fees are pass-through costs, meaning the acquirer charges the merchant the exact amount assessed by the card issuer. However, some acquirers may choose to add a markup to interchange fees, in which case the merchant would be charged more than the cost of processing the transaction.
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Why are interchange fees required?
Card issuers assess interchange fees to help offset the costs associated with issuing and maintaining credit and debit cards. These costs can include things like fraud protection, customer service, marketing, and rewards programs.
In addition, interchange fees help to ensure that cardholders continue to use their cards for purchases by making it more profitable for merchants to accept card payments. If interchange fees were not in place, it is likely that merchants would be less willing to accept card payments, which would ultimately lead to fewer transactions and less revenue for card issuers.
What are the different types of interchange fees?
There are two main types of interchange fees: assessment fees and transaction fees.
Assessment fees are charged by the card issuer on a per-transaction basis and are typically a percentage of the total transaction amount. For example, if a card issuer charges an interchange fee of 1%, and a customer makes a purchase using their credit card for $100, the card issuer would assess a fee of $1.
Transaction fees, on the other hand, are flat fees charged on a per-transaction basis. So, if a card issuer charges a transaction fee of $0.10, and a customer makes a purchase using their credit card for $100, the card issuer would assess a fee of $0.10.
Which type of interchange fee is charged depends on the card network (Visa, Mastercard, etc.) as well as the card type (credit, debit, etc.).
What are the major card networks?
There are four major card networks: Visa, Mastercard, Discover, and American Express. Each network has its own set of interchange fees that apply to transactions processed using their cards.
Visa and Mastercard are the two largest card networks, accounting for the majority of credit and debit card transactions in the US. Discover and American Express are smaller, but still significant, players in the US card market.
What are the major card types?
There are three major types of cards: credit cards, debit cards, and prepaid cards. Each type of card has its own set of interchange fees that apply to transactions processed using that type of card.
Credit cards are the most commonly used type of card in the US. Debit cards are also widely used, but not to the same extent as credit cards. Prepaid cards are a less common type of card, but their use is growing.
What factors affect interchange fees?
There are a number of factors that can affect the interchange fee charged on a particular transaction, including the card network, the card type, the merchant category code, the transaction amount, and whether or not the card is present at the time of purchase.
- Card Network: As mentioned above, each card network has its own set of interchange fees. So, if a transaction is processed using a Visa card, the interchange fee will be different than if the same transaction was processed using a Mastercard.
- Card Type: Credit cards, debit cards, and prepaid cards each have their own interchange fee schedules. In general, credit card interchange fees are higher than debit card interchange fees, which are in turn higher than prepaid card interchange fees.
- Merchant Category Code: Interchange fees also vary depending on the merchant category code (MCC) of the merchant processing the transaction. MCCs are codes used to classify businesses by the type of goods or services they sell. Some examples of common MCCs are 5411 (grocery stores), 5912 (drug stores), and 7995 (gaming establishments).
- Transaction Amount: The interchange fee charged on a transaction also generally varies depending on the transaction amount. In general, higher transaction amounts result in higher interchange fees.
- Card Present vs. Card Not Present: Interchange fees can also differ depending on whether or not the card is present at the time of purchase. Card-present transactions (i.e., transactions where the card is physically present, such as in a brick-and-mortar store) typically have lower interchange fees than card-not-present transactions (i.e., transactions where the card is not physically present, such as online or over the phone).
What are some examples of interchange fees?
Here are a few examples of interchange fees that might be charged on various types of transactions:
Visa Credit Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 0.05% + $0.10 Card-Not-Present Transaction 0.80% + $0.10
Mastercard Credit Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 0.05% + $0.15 Card-Not-Present Transaction 1.00% + $0.15
Discover Credit Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 0.05% + $0.10 Card-Not-Present Transaction 1.00% + $0.10
American Express Credit Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 2.50% + $0.30 Card-Not-Present Transaction 2.50% + $0.30
Visa Debit Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 0.05% + $0.21 Card-Not-Present Transaction 0.80% + $0.21
Mastercard Debit Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 0.05% + $0.26 Card-Not-Present Transaction 1.00% + $0.26
Discover Debit Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 0.05% + $0.11 Card-Not-Present Transaction 1.00% + $0.11
Prepaid Card Interchange Fees:
Transaction Type Interchange Fee Card-Present Transaction 0.05% + $0.15 Card-Not-Present Transaction 1.00% + $0.15
How do merchants save on interchange fees?
There are a few different ways that merchants can save on interchange fees:
- Use the right type of card processing equipment: Using card present equipment (such as a point-of-sale system) can help you qualify for lower interchange rates.
- Use the right type of card: Debit cards and prepaid cards generally have lower interchange fees than credit cards.
- Negotiate with your processor: Some processors may be willing to negotiate interchange fees with you, especially if you’re a high-volume merchant.
- Use an interchange-plus pricing model: An interchange-plus pricing model can help you save money on interchange fees by transparently passing the fees on to you (instead of hiding them in a markup).
- Get a business credit card: Some business credit cards offer rewards or cash back on purchases, which can help offset the cost of interchange fees.
Do merchants have to pay interchange fees?
Yes, merchants are typically required to pay interchange fees when they accept credit, debit, or prepaid card payments. In most cases, these fees are passed on to the customer in the form of a surcharge.
What is an interchange fee surcharge?
An interchange fee surcharge is an additional fee that a merchant adds to a transaction in order to offset the cost of interchange fees. Interchange fee surcharges are typically only allowed on credit card transactions, and they must be disclosed to the customer before the transaction is completed.